In addition to the trend-following strategy there is a different trading strategy that is often used in the field of
Binary Options. This is the so-called volatility strategy. To illustrate the volatility strategy it is helpful to explain the difference to the trend-following strategy. In the trend-following
strategy it is known that the trader makes a profit if the underlying moves in a certain direction so that it follows a certain trend. Gains are only achieved e.g. at a rising rate. For the
volatility strategy it is unimportant in which direction the course moves. The important thing is that the price moves in the widest possible range.
How does the volatility strategy work?
The volatility strategy always works very well when rates move in wide ranges. Such fluctuations occur e.g. according to a published message to the company (in shares) or even after publication of the balance sheet figures. But also other news e.g. for any commodity or currency can trigger larger price movements. For the volatility strategy the trader does not need to "predict" in which direction the price will move. It is essential that the price of the underlying rises or falls as much as possible so that it comes to the "extreme" movement. To pursue this strategy the trader buys mostly a call and a put option of course with the same underlying.
Volatility Strategy in practice
How the volatility strategy works in practice can be illustrated very well in an exemplary trade. As already briefly mentioned above a call and a put option with the same underlying are bought. And this does not happen with the simple Binary Options but rather more suitable here are the One-Touch Options. These Options in One Touch mode must touch a specific price. The purchase of the two options (call and put) should be performed when a certain "event" is imminent which could affect the price of the underlying on a larger scale. This could be e.g. a message about a possible takeover (shares). Now there are two possible scenarios as the share price will respond according to the message. Will the acquisition announced the share price is likely to rise sharply. Otherwise the traders and investors could be disappointed which can cause a significant price decline. To cover both cases the trader should buy a one-touch call and a one-touch put option with identical maturities and with the same investment capital.
Trade the volatility strategy successfully
In the area of one-touch options up to 500 percent of profits are possible if you choose the so-called high-yield area. These potential gains over 200 per cent are an important prerequisite for the functioning of the volatility strategy. Suppose you now buy for 200 euro a one-touch call option and also for 200 Euro a one-touch put option with the underlying pattern shares so a return of 500 percent is possible (each Option). This profit you get when the price of the pattern shares within the next five hours rises from 10.20 euros to 11.50 euros (call option) or falls to 8.90 euros (put option). Should the price of the pattern-share now move to 11,50 Euro or fall to 8.90 euros (after the publication of the message) at least once you would have made a profit. With one Binary Option you would have indeed lost 200 euros but with the other Option you made exactly 1,000 Euro. Your profit would therefore be a total of 600 Euro. The risk on this trade on the volatility strategy is that the price does not move to the expected extent. If the rise in share price moves in our example in the next five hours to only a maximum of 11,20 € you would have lost 400 euros.
Read on: Hedging